What is the impact VAT will have on the Real Estate of UAE ?
The value-added tax (VAT) has been introduced in the UAE from 1st, January 2018. Among the industries that will be affected by VAT, real estate sector is the major one.
Real Estate Definitions for VAT
Supply : Any sale, lease or transfer of rights of any property will be considered a real estate supply for the purpose of the tax.
Residential building : Any building or a part of a building that is intended to be used by individuals as a place of residence. A building cannot be considered residential in any of the following cases :
- Any place or building that is not fixed to the ground or can be moved without damaging it.
- Any building being used as a hotel, hostel, hospital, motel, bed, and breakfast or any related service.
- A building that is constructed without permission or proper authority.
- Service apartments where services are also provided, in addition to accommodation.
Commercial building : Any building or a part of it which is not being used as a residential property is a commercial building. Hotels and shops are the examples of it.
VAT on residential properties
The first supply/sale of a newly constructed residential building will be treated as a zero-rated supply for VAT, given that the property is sold within three years of its construction. However, the subsequent supplies of the same property shall be exempt from tax.
VAT on commercial buildings
The tax will be applicable at the standard VAT rate of 5% on the supply of all commercial properties such as offices, hotels, retail, etc.
There is no tax on the rental of residential properties, however, the rent/sale of a commercial building is subject to 5% VAT.
VAT on mixed-use buildings (residential and commercial)
The supply of a residential part of a building shall be zero-rated (the first supply) or exempt. The supply of a commercial part of a building shall be subject to 5% VAT.
That means the sale/rent of a mixed-use property should be treated accordingly. The tax paid on the taxable portion may be recovered. Extra VAT will be charged on real estate broker’s total commission.
VAT Registration for Real Estate Owners
The owners of residential properties are not required to register for VAT unless they have any other taxable business activities. However, the owner of a commercial property (or a residential property being used for commercial purposes) will have to register for tax if the supplied value over the past 12 months is more than the VAT threshold of Dh 375,000 or is expected to reach this limit over the period of next 30 days.
Recovery of the tax paid on a real estate property
The value-added tax also has the mechanism of tax refund in specific cases.
The VAT paid by the owner of a residential building in respect of expense related to tax-exempt supplies of the building will not be recoverable or cannot be charged from the customers. The owner of a commercial building can recover the VAT paid in respect of the supplies.